The Baltic Dry Is Jumping, But Don't Draw Any Broad Conclusions

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Those who consistently preach doom and gloom and see an economic apocalypse around every corner would make me laugh if it weren’t for the fact that their shtick so often costs ordinary investors money. You know the type I mean. Every time the market has a bad day they are trotted out on the business channels, often even in the “news” media and tell us that this time is the beginning of a collapse. I am sure that they genuinely believe what they are saying and think they are doing the right thing, but allowing your investment decisions to be driven by fear is usually a mistake.

Sooner or later, like a broken clock, I guess they will be right, but most of these people started to warn us of the impending trouble two or three years ago and it is worth remembering that three years ago today the S&P 500 closed at 1123.82 versus yesterday’s new all time high of 1986.82, a 76.79 percent increase. We could get a 40 percent collapse now and anybody who stayed invested would still be better off than those who listened three years ago.

At the end of 2011 the evidence that many claimed “proved” that another global meltdown was just around the corner was the dramatic drop in the Baltic Dry Index (BDI). The BDI is issued by the Baltic Exchange in London and gives an indication of the prevailing rates for the shipping of dry bulk goods, more specifically commodities. Those that follow the index claim that it gives a forward indication of global demand for iron ore, coal etc., and therefore an advance indication of stock market performance. This sounds great in theory, but it is not supported by recent evidence.


As you can see the fall from over 2100 to around 750 was pretty spectacular, but it certainly didn’t presage a collapse. Here’s the S&P 500 chart for the same three year period.

Not an awful lot of correlation there, as I am sure you can see. Part of the problem is no doubt that actually making things is a lot less important in the modern global economy than it once was, but it is also too simplistic to assume that price moves are only down to demand by end users. Obviously, shipping capacity and supply fluctuations in the products themselves also have an effect.

That makes me wary of drawing big, broad, positive conclusions from the recent rally in the BDI as some have done. In the last month the index has jumped over 50 percent with the bulk of that increase coming in the last ten days. This may mean nothing for stocks in general, but there is no doubt it is a positive for shipping stocks. As a result, even though there has already been a significant rally in the last couple of weeks, the broad based Guggenheim Global Shipping ETF (SEA) could be poised to push through the 52 week high of $23.32 and continue the march up.

Some hesitation, maybe even a slight correction is likely as that level is reached, so this may be a good time for a little patience, but if there is any sign of weakness in the next few days I would regard it as a buying opportunity. Even if you buy at current levels around $23, though, there would seem to be plenty of upside and a logical stop loss level around 12 percent away makes for a reasonable risk/reward ratio.

Given the total lack of correlation between the BDI and stocks in general I hesitate to draw any conclusions from the current level. To do so would be hypocritical, having just mocked those who did just that three years ago but, by definition, rising shipping rates must increase revenues for shipping companies with an active fleet that use spot pricing, and that should be reflected in SEA. The BDI tells us that much at least, but the days of the index as an indicator of future stock prices in general look to be over.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , ETFs , International

Referenced Stocks: SEA

Martin Tillier


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